Principles of the Free Market

The basic postulates required for a functional free market.

A free market is usually defined as an economic system in which prices of goods and services are determined by the laws of supply and demand, with minimal government regulation. I think this is a rather high level definition though, and I prefer to define a free market as a market in which consenting parties engage in the voluntary exchange of goods and services. This is consistent with Murray Rothbard’s definition, that the free market is a summary term for an array of exchanges that take place in society [where] each exchange is undertaken as a voluntary agreement between two people, or between groups of people represented by agents. Rothbard’s definition and mine, I think, touch on the most important and fundamental point, which is that exchanges are entirely voluntary in a free market.

In this article I want to discuss what I think are the fundamental principles of the free market. There are many postulates that can be considered as principles of the free market. However I want to examine the free market at a very fundamental level, and so I will avoid high level principles. I will only consider those principles whose origins can be found in the natural rights of the participants in the economy. I believe these principles can be narrowed down to four, and any others can be derived from these. The four principles are:

• The right to own property,
• The right to exchange one’s personal property with others,
• Equality of all participants,
• Limited regulation.

The Right to Own Property

Before any two people can exchange their property with each other, they both have to own their property. Otherwise they will be infringing on the rights of others who may own that property. How does one come to own property though? John Locke argued that property ownership comes about by the exertion of labour on natural resources. Locke’s model supposes that natural resources start off being unowned, and then individuals, by applying their labour to it, acquire ownership of it. The individual’s labour is assumed to have somehow entered the object, making that resource the property of that individual. There are some objections to this model, but Locke held that the model was only valid if there was enough of that resource left for others.

I will later discuss in detail my model of property ownership in the true free market. I will say now, that in contrast to Locke’s model, it starts off with natural resources being owned by everyone. Natural resources are shared property owned by everyone. Each person can use that resource up to some level that is considered fair use. If a person wishes to utilise a resource beyond her fair share, then she is obligated to compensate the other joint owners of that resource. Individual ownership of property comes about when a person wishes to use a resource on her own, and the other owners have no real use for that resource. Compensating the other owners changes the ownership from shared to private. Note that this model does not suggest that this is how we got private property, but rather presents an alternative way for acquiring private property. I believe that assuming shared ownership of resources first, and then obtaining private ownership by compensating other owners of a given resource, provides a fairer and more consistent way to acquire rights to a resource than Locke’s model.

The Right to Exchange Property

Given that a person owns some property, he has the right to exchange it for another person’s property, provided that the other person agrees to the exchange. When both parties agree to the exchange, then it is voluntary, which is the key characteristic of the free market. Other characteristics of the free market, such as competition, can be derived from this principle. Voluntary exchange means people have options in terms of who they can obtain a good or service from. That leads to competition and price discovery by the market.

Involuntary exchange is not allowed in the free market. For example if a thief takes someone else’s property without their consent, then that violates the property rights of the person whose property was taken. Similarly if the government takes a tax out of your pay cheque without your consent, then that violates your property rights. Thus taxation is a no-no in a true free market, which is why I say we have never had one.

Equality of All Participants

All participants in the free market, across all scales, should have the same rights. This means that individuals, companies, and even the government have the same rights. This principle ensures that no participant is given undue advantage in the market. This means for example that the idea that some companies are “too big to fail” is unacceptable in the free market. Similarly, the true free market does not limit currency creation to the banking sector but gives all participants in the economy equal opportunity to create currency. Furthermore, legal tender laws go against this principle as they give a monopolistic advantage to one currency creator.

Even the government is not exempt from this principle, as it is only another participant in the free market, and has the same rights as other participants. Thus taxation, which gives the government the right to confiscate others’ property, cannot be allowed in a free market. Government’s ability to pass laws means that they may try to appropriate certain powers for themselves, and it is important that the scope of regulations that they can pass be well defined.

Limited Regulation

The free market cannot be completely devoid of regulations as that would bring about anarchy. The participants in the market have rights, as mentioned before, and these rights may sometimes be violated by those with bad intentions. Society needs to deal with violations of the rights of its members. Any regulations in place should be exclusively to deal with such violations. In a free market, regulations passed by the government must be limited to protecting the natural rights of the members of society. Any regulation that affects supply and demand of goods and services is distorting the market and can have unintended consequences.

These are the principles that the true free market is based on, and they define the rights of the participants in the economy. They can own property, exchange it freely, and be sure that their rights are protected from those with ill intent. At a very fundamental level, I think these are the principles that make the free market what it should be, so that everyone can have equal opportunity to succeed.