The Free Market: Cornerstone of a Free Society

At the outset of the 21^st century, America faces a number of economic challenges that have given its citizens pause; the subprime mortgage crisis, a rising tide of illegal immigration, industries which are moving offshore, and the aging Boomer population, which moves ever closer to retirement and collection of Social Security benefits. In response, many Americans look to the engine of government to alleviate their concerns and institute a new period of economic growth. While the impulse to expect solutions from politicians is understandable, in this case, it is incorrect: the free market is the guarantor of prosperity, not bureaucratic institutions or elected officials.

While many politicians decry the notion of "profit-seeking" and paint CEOS as greedy and unscrupulous, history has yielded two lessons regarding the free market: reliance on a capitalist economic system is the best way to ensure a prosperous society, and the practice of free market economics protects and enhances our fundamental political freedoms.

From the dawn of time, men and women have engaged in the act of bartering, for the simple reason that no one person can manufacture everything he or she wants or needs. From Esau selling his birthright for porridge[i] to the much larger scale of trade between ancient Israel and its neighbors[ii], the act of buying and selling is a vital component of human behavior.

As Adam Smith noted in The Wealth of Nations, this system of cooperation is created and sustained through voluntary interaction: no chieftain or government ordained that humankind exchange goods. Historically, buying and selling has occurred only when all parties believe they have something to gain from the exchange. Thus, "the real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it."[iii]

The two concepts examined in the previous statement, price and value, are inseparable from capitalism, for no one wants to pay more than what he or she feels a good or service is worth. The sum total of the baker's efforts to bake bread, the time, labor, and parts that go into assembling an automobile--these determine what the products are worth. Because of the myriad of considerations which factor into the price framework, a system of such complexity cannot be created or effectively administered by a central entity.

When government becomes involved in economic activity, the result is usually a form of price control. Milton Friedman explained in Free to Choose that even during a period of economic crisis, such intervention hurts more than it helps. During the OPEC oil embargo of 1974, and the 1979 Islamic revolution in Iran, "...there was a sharp disturbance in the supply of crude oil from abroad. But that did not lead to gasoline lines in Germany or Japan, which are wholly dependent on imported oil. It led to gasoline lines in the United States because government agency did not permit the price system to function."[iv]
Prices transmit information to buyers and sellers about how much of a product exists, and how badly people want it. By disrupting the flow of supply and demand, the government turned a problem into a true energy crisis.

This is not to say that government has absolutely no role in influencing economic activity; rather, its role should be limited to a watchdog capacity. As an increasingly complex lattice of transactions is formed through economic activity, trust comes to play an integral role in a free market economy for one simple reason; for economic expansion to proceed, people must trust one another.

A hypothetical scenario which illustrates this involves a person who purchases a book on Amazon.com. The customer logs onto the internet, navigates to the proper page, enters his or her credit card information, and approximately two weeks later, receives the book in the mail. The buyer had no face to face contact with anyone else at any stage of the transaction, and had only Amazon's guarantee that they would indeed receive the requested product in exchange for payment.

And yet, this scenario plays itself out all over the world in countless venues; consumers do not see all of the moving parts of this machine called capitalism, yet the system works amazingly well...provided the players trust one another. Here is where government plays a vital role: by creating and enforcing laws against theft, embezzlement, and fraud, the rule of law is upheld and a clear, unequivocal message is sent to all participants in the
economy: no cheating. The knowledge that rule-breaking will be followed by swift and severe punishment is what sustains the trust behind transactions and ensures a robust economic system.

This understanding of the relationship between the rule of law and a prosperous society can also be found in the Bible. When God led the children of Israel out of Egypt, His
first priority was to establish a basic code of behavior for everyday Hebrew life. The Deuteronomic code stipulated everything from religious precepts to punishments for criminal offenses. These legal codes were administered by Moses and other judges.[v]

God commanded the children of to "keep all my decrees and laws and follow them...I will give [the land] to you as an inheritance, a land flowing with milk and honey."[vi]
The prosperity that God promised was conditional, however; in order for the Hebrews to enjoy societal and economic growth, they would have to uphold the laws. Long before the underlying concepts of capitalism were explored by Adam Smith, God entrusted the children of Israel with the law, in order that they might build the trust necessary to sustain a society.

When that trust is violated, it leads to breakdowns in the system. An example of this is the collapse of Enron in 2001. Though Enron was in financial trouble, its executives deceived the company's shareholders and employees by assuring them of the company's "long-term viability."[vii] Enron's
bankruptcy, along with Adelphia, WorldCom, and a number of other corporations led to an economic slowdown at the end of 2001 and the beginning of 2002. As these companies behaved in an untrustworthy manner, consumers lost confidence in their ability to deliver, and by extension, in the American economy itself.

Another example of this causal relationship between the erosion of trust and economic slowdown is the contributory role that the subprime mortgage crisis has played in the current economy. During the fall of 2006, a large number of consumers began to default on high-risk mortages they had incurred on property that they believed would continue to increase in value. When the increase in value did not occur, they lost the ability to refinance, and were unable to make payments on the properties. As a result, the housing
market has slowed to a crawl and demand for real-estate is low.

Periods of market instability such as the 2001 recession and the more recent bursting bubble of the housing market understandably provokes anxiety; such fluctuations are a sobering reminder of the fluid nature of a free market system. A free market economy is constantly recalibrating in response to the actions, desires, and needs of its participants. A statist economy, on the other hand, is characterized by its static nature--very little
surprises occur in a government-run economy. The downside to such predictability is in the nature of such a system. Governments cannot legislate prosperity; they can however, mandate poverty and create scarcity. The advantage of a free market lies in its responsiveness to humanity's wants and needs, and its capacity to meet them. This essential freedom inherent in such a system is engrained in the very bones of the American nation-state.

As Friedman, Smith, and others have noted, economic freedom in its own right; however, the free market is not merely desirable because of the prosperity it brings. It also serves as a catalyst for and a protector of political and human rights. Skeptics are quick to point out that increasingly capitalist China still has a woeful record on human rights, or that international corporations commonly exploit workers in developing countries. Despite these points, the historical record is clear: free markets disproportionately empower thedisempowered.

The empowerment offered by capitalism is nothing less than control over one's economic fate: the ability to gain upward mobility while providing for one's family. A potent example of this is Botswana Though it has little in the way of natural resources, Botswana is one of sub-Saharan Africa's most productive countries; its free market system has led to a steady increase in standard of living and quality of life for its citizens. Its neighbor Zaire, is rich with resources and arable land, yet is one of the poorest nations in the world. Zaire's statist economy is firmly controlled by an authoritarian government which has
been rocked by multiple revolutions, coups and assassinations.[viii]

This phenomenon can be explained by the close relationship between economic and political freedom. As Dan Griswold, associate director of Trade Policy Studies at the Cato Institute explains, "Economic liberalization provides a counterweight to governmental power and creates space for civil society. And by promoting faster growth, trade promotes political freedom indirectly by creating an economically independent and political aware middle class."[ix]

Nowhere is this more evident than in the founding of the United States. While the American colonies did not develop a sense of political union overnight, at the time of the American Revolution, the colonies had close economic ties to one another, laid by their allegiance to Britain, and cemented by the subsequent flows of commerce. The bountiful resources of the New World coupled with the innovative and entrepreneurial spirit of
the American colonists had created bustling trade up and down the Eastern seaboard and growing prosperity for its inhabitants.

When King George III attempted to tax the colonists at will, the monarch made two mistakes; he had not counted on the fact that a higher standard of living raises citizens' expectations across the board, and he was threatening their livelihoods. The colonists expected the political rights that accompanied citizenship in the British Empire--primarily,
the right to bring their grievances before the government. This was not merely a stand on principle; the Americans wanted to protect what they had built from a rapacious government.

Seen in that light, it hardly seems coincidental that many of the Founders were middle-class land owners, and that the right to property was mentioned so prominently in the writing of the Constitution. The Founding Fathers understood that economic freedom establishes the existence of a private sphere in society. This is the hedge that limits government power, and provides the foundation for successive political rights.

The liberating power of capitalism is not merely a domestic policy; reliance on the triumph of economic freedom over tyranny was also the strategy that won the Cold War. Beginning with George Kennan's "Long Telegram," the US adopted the policy of containment, betting that the fragile and stunted Soviet economy would be unable to withstand the pressure. When the Politburo cracked and instituted the policies of glasnost and perestroika, the virus of free enterprise was introduced into the Soviet system.

As the Soviet leaders learned to their chagrin, the capitalist system has little tolerance for the corruption and waste endemic to statist societies. The character of the master in Jesus' "Parable of the Talents" is a perfect illustration of this ruthless efficiency. The master, who has entrusted his servants with varying amounts of money, returns to collect on his investments and finds that one servant merely dug a hole, and hid the talent in the ground. "...You should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest." 'Take the talent from him and give it to the one who has the ten talents. For everyone who has will be given more, and he will have an abundance. Whoever does not have, even what he has will be taken from him."[x]
In similar fashion, the corrupt Politburo was divested of their economic power, which was turned over to those who would "invest" more prudently: the Russian people.

Economic opportunity fanned the flame of hope, and the Russian people clamored for the political dignity that the Soviet Union had denied them. Once a vibrant market economy has been established, and government has granted political rights to its citizens, it's extremely tough for the governing body to turn back the clock--again, for reasons largely to do with expectations. As Thomas P.M. Barnett, a former Pentagon analyst noted, "good markets need good governments,"[xi]
and once a government has staked its legitimacy on its citizens' well-being, it would be extremely unwise to jeopardize economic prosperity by placing constraints on political or economic freedom.

Unfortunately, there are no easy answers or quick fixes to economic downturns such as the one facing the United States at the current time. Direct intervention by the government will almost certainly upset the balance of supply and demand, and tinkering with the mechanics of economic incentives often yields unintended consequences. However, if the government concentrates on enforcing existing laws, reining in taxing and spending, and encouraging efforts to equip students for competition in a global economy, there can be little doubt that American ingenuity and hard work will continue to ensure a
prosperous future for its citizens.