In 1970’s Russia, housewives spent two hours per day, seven days per week, to buy basic household necessities. Centralised control in the Soviet Union caused chaos. There was no personal choice, no voluntary exchange, no freedom to enter and compete in markets, and no private ownership of property and the means of production. What operated there was the opposite of a free market.
In his book The Russians, Hedrick Smith, 1970’s Moscow representative of the New York Times reported that: “In spite of the various tinkering reforms, the Soviet economy … operates by Plan from above rather than in response to consumer demand from below and this produces a lop-sided assortment of goods. Sometimes the anomalies are baffling. Leningrad can be overstocked with cross-country skis and yet go several months without soap for washing dishes.”
In markets without centralised control products flow in to feed the people of the largest cities and smallest villages, to provide them with clothing, medicines and all the other goods for which there is a demand. Careful planning and efficiencies by the private firms involved in the production, packing, transport and delivery of all these products and services are taken for granted.
Free markets create the incentives and the disciplines for suppliers of goods and services, pursuing their own self-interest as everyone does, to provide their customers, clients and patients with the best quality goods and services at the lowest prices. No supplier in a competitive market can escape the discipline provided by the presence of alternative suppliers of similar goods and services operating in an environment in which the rule of law prevails.
“Free markets are simply millions upon millions of individual decision-makers, engaged in peaceable, voluntary exchange pursuing what they see in their best interests,” says economist Walter Williams. He goes on to say that, “People who denounce the free market and voluntary exchange, and are for control and coercion, believe they have more intelligence and superior wisdom to the masses. What's more, they believe they've been ordained to forcibly impose that wisdom on the rest of us. Of course, they have what they consider good reasons for doing so, but every tyrant that has ever existed has had what he believed were good reasons for restricting the liberty of others.”
Proponents of free markets (economic freedom) are in favour of people making their own decisions and choices about their own lives, as long as they do so peacefully and their exchanges with others are entirely voluntary.
In free markets, consumers decide which goods and services will be produced, the quality, and the price. They do this by purchasing or declining to purchase what is offered to them. Prices are the result of the subjective value judgements of consumers. There is no objective value for anything and it is this resulting price that provides the vital information for the co-ordination of supply and demand and the efficient use of resources. Suppliers, not consumers, pay for the mistakes of misjudging the market and fraud is punished when the legal system is accessible to consumers and functioning efficiently.
But the information required becomes available only when consumers are allowed to exercise their choices in markets that are free of price regulation. Regulatory tampering with prices has the destructive effect of depriving everyone of information. Where rising prices in an unregulated market are a sign of a shortage and a signal for producers to increase supply, a controlled price suppresses the signs of increased demand and causes a shortage of a product, such as a vaccine or medicine, for which there could be a desperate demand.
Countries that have greater economic freedom have higher economic growth and higher per capita incomes than less free countries. People in freer countries are healthier, live longer, are more productive, have more political rights and civil liberties, and the incomes of the poorest 10% are almost three times higher than those in less free countries. The key ingredients of economic freedom are personal choice, voluntary exchange co-ordinated by markets, freedom to enter and compete in markets, and protection of persons and their property from aggression by others.
Switzerland, a country made up of people of many cultures, languages and religions, is the best example of a free market in operation. The Swiss people, in much the same way that they are in control of their economy as consumers, are in control of political decision-making. In politics they do not vote politicians into office and give them carte blanche until the next elections; they vote on issues. They are free to call referendums at any time to over-rule the decisions of politicians or even to recall politicians who fail to properly represent their interests.
The Swiss people are known for their insistence on respect for the law. A free market does not operate in conditions of lawless chaos – proper application of the rule of law is a pre-requisite for its existence. The rule of law, in turn, requires a clear separation of powers between the executive, legislative and judicial arms of government.
To comply with the rule of law, the executive should not attempt to exercise arbitrary discretionary powers that have not been conferred on it by the constitution, or contained in legislation that specifies objective criteria for the exercise of those powers. A legal system that is filled with uncertainty as to what the law intends, and what the courts may decide, is not consistent with economic freedom or conducive to the high levels of entrepreneurial activity and economic growth that free markets can deliver.
Direct democracy, economic freedom and the application of the rule of law have given the Swiss people many years of peace and prosperity. They demand the strict observance of contracts and respect for property rights; important characteristics of free markets and characteristics that some people regard as excessively rigid. Far from being an environment in which anything goes, a free market is very much rules-based, including respect for persons and their property.
The Swiss system of direct democracy puts all of the people in charge at all times. Switzerland is an example of how people of different cultures, languages and religions can learn to live together in peace and prosperity. An example worth following.
Author: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Foundation.
FMF Feature Article / 08 September 2009