How Free Was My Market

Among the institutional arrangements that an MPP student must untangle early is the relationship between governments and the market.

It is not uncommon to come across TV pundits or online influencers speaking of regulation “stifling” the free market. So what is this species, a free market? An inattentive student might be forgiven for assuming that what a market is supposed to be free from is regulation itself. Worse, the more they hear this framing, casual observers begin to compartmentalize regulation and markets as a dichotomy, two forces that are mutually at odds. If you are for one, you are against the other. It is one of those sad cases of dogma that arises in a fallacy and then propagates that fallacy.

Markets are not a primeval Garden of Eden into which Adam and Eve are airdropped, a pristine system that they are obliged to forever tend without interfering with the fruit. Rather, think of grand witches and wizards gathering in a holy place, mumbling ancient, coded enchantments and conjuring a magical contraption. That is what our elected representatives do for us in a parliament – they conjure useful fictions into being. For a less tortured metaphor, saying, “I like markets, but I don’t like regulation”, is like saying, “I love watching tennis, but we could do without all those pesky white lines on the court!”

Back to first Principles, market is regulation. You cannot have the former without the latter. In fact, the former is just a specific case of the latter. The tennis rulebook is not as shackles on the hands and feet of players. It exists to specify those white lines. Serena Williams would never need to develop her level of skill in the game if you just removed the net and asked her to play a talented opponent on an unmarked court. (I would love to see someone make the suggestion to her face!) In all likelihood, she would quit the game altogether. There are people in this world who would love to play tennis without the net or lines. You would not pay to watch that match.

Sports events are competitions, and each sport has a rulebook to ensure two things in equal measure: that the competition is fair and that it is fun. The fun bit has to do with a challenge. If the basket were much larger or lower, basketball would be much less fun – to play or watch. The width of the basket’s rim and its height off the ground are the very definition of basketball as a game. That width and height and every other rule are carefully calibrated to make the game fair and fun. Over time, as societies progress, better nutrition becomes widely available, excluded groups overcome barriers, and as technology advances, all sports adjust their rulebook and adopt new rules to keep the games fair and fun.

The ‘free’ in the free market does not refer to something scary outside that markets need protecting from. It refers to the freedom that agents get to exercise in a market. A free market is one where enterprise is free, where firms are free to engage in economic activity that society values. Who ensures that firms are free to enter the playground and that there are no bullies there? How do values elected by society mark and shape the playing field? If you tentatively guessed, “Uh…regulation?” congrats, you are now in the game! Within the bounds that society so sets, the price mechanism smoothly ensures that all available resources are most efficiently converted into goods and services to satisfy the maximum number of people, all without the need for a single committee, plan or meeting expressly towards that aim. Magical contraption, indeed.

What, then, does threaten such freedom? Even better than the sports metaphor might be to just ask a firm that is in the business of games. The creator of the sensationally popular online game Fortnite is called Epic Games. By any measure, that is not a small business. As it happens, the company itself plays in an uneven arena. The Apple App Store is a market within a market. When Apple decides to charge an exorbitant cut on all sales made on its platform, that market is less free. When Google tweaks its algorithm such that it changes the internet traffic landscape overnight for thousands of firms, several other online marketplaces are less free. It is rather like Rafael Nadal blocking the entrance and charging exorbitant tickets at some tennis tournament where Carlos Alcaraz is trying to make his own name.

That is entirely different from society at large saying they would like to have clean air at a certain standard. Yes, accounting for that ‘externality’ will raise the costs of production. And yes, it is the government’s job to minimize the burden of every regulation. Most governments could work harder and apply more imagination when designing new rules. But those rules are simply white lines on the game court. If all the firms compete fairly within the court as outlined, the market remains very free. Of course, societies rarely stumble upon instant consensus on anything. Four or five years later, adifferent party may win enough votes to control parliament. The new parliament may decide that they want to give maximum industrial output explicit primacy over clean air and water for children in the next generation, after all. That party recognizes that, even for children as end consumers themselves, maximum production of toys and sweets occurs in an economy where firms are not burdened with such meddlesome trifles as ensuring that there are no toxic materials in either. The older regulation is rolled back, and the market reverts. Nothing in the above conception of the free market deems that filthier, riskier, larger economy illegitimate. Nothing in this conception says that industries must by default defer to environmental or health standards at all costs.

In another jurisdiction, technology may advance to a level where the same clean air and water standards are now achievable with higher levels of industrial output. Sports amend rules to accommodate new technology all the time, as table tennis did when televisions became ubiquitous. Note also that such innovation is more likely to occur in a jurisdiction with high environmental standards to begin with, compared to a counterfactual world where there were no costs to polluting whatsoever. Again, you see, it is the challenge that makes the game fun. If we faced no constraints, we would never innovate.

If you are a firm that operates in a market where the voters do not consistently challenge you, fair play to you and may the best firm, regardless, win!