What Is a Free Market?

A listener asks Dave to define what a free market is. Dave explains.

QUESTION: A listener asks Dave to define what a free market is and how it works. Dave not only defines a free market but explains what the effect on the economy is, why capitalism works, and how regulation helps prevent anarchy.

ANSWER: Sure. Like a lot of economic terms or terminology, the politically correct police have redefined some of these things, and so you may get varying definitions from a free market.

I got a degree in business, which included a lot of economics classes, a lot of accounting classes, a lot of finance classes, statistics and so forth back in the day—back when dinosaurs roamed the earth. Back then, I think we really understood what a free market is.

A free market is when buyers and sellers are free to do business. If you want to buy a shirt and there’s no impediment, no barrier to you buying that shirt and the seller wants to sell a shirt and there’s no barrier or impediment to them to do that, then that’s a free market. Markets that are less than free are highly regulated markets, and the more regulation there is, the more the market slows down. Free markets have a tendency to be more efficient and create things like supply-demand curves.

Supply/demand curve, most people understand that basic thing of economics is simply that the greater the supply of anything and the accessibility of that thing, the cheaper the price of it is. When there are too many homes on the market, home prices tend to go down or not to increase as much. If there’s a shortage of homes, then home prices tend to shoot up in an area. The market’s hot. You can’t get one.

The supply/demand curves work better when there’s not regulation slowing down the speed of doing business. People argue that regulation is needed because people are immoral and they take advantage without regulatory things to keep immoral people from doing business improperly. It’s certainly a reasonable argument. The problem is like so many things that are reasonable, when taken to an extreme, it becomes unreasonable.

I like markets to be free because I like freedom. I don’t like governments telling me what to do, and I’m of the opinion that people have a tendency towards what we call sanctified capitalism—people being moral—as much as they do towards a free-for-all anarchy-type capitalism—capitalism where no morals apply.

Here’s the truth: The truth is that as you study the history of economics, the history of markets and capitalism, that people who are dishonest are eventually punished by the market. Now there are exceptions to that and there are situations—stuff like a monopoly and anti-trust things—that come into play. But this idea that you can put so many regulations on things that everyone is always protected from dishonest people is ludicrous. Let the market punish someone who doesn’t do a good job.

Let me tell you, if I go into a restaurant and eat, I don’t care if it has a 100 score on the side or an A or a B or however they rate it with the health department in that area. If it’s dirty and slimy and greasy, not only am I not going to eat there again, the next time someone mentions it, I’m going to say, “Ew. Don’t go over there. That place is filthy. You’re going to catch something. Seriously. You’re going to die.” And so the fact that they don’t keep it clean loses them customers more than the health department does coming in and regulating them. So the marketplace will punish a restaurant for being dirty. “Are you saying health departments shouldn’t regulate?” No, I’m using that as an example as a free-market issue.

The market will punish if there’s reasonable access to information. The market will punish a company that is doing things late, doing things poorly, overcharging, delivering bad quality, dangerous products—all of those kinds of things.

Now, there’s a certain amount of regulation that’s going to be in a civilized society. The problem is that we have people that are so nannyfied, that are so driven by the nanny-state mentality, that they have this idea that in order for everyone to never have any pain, there has to be enough government regulation, and there’s no such thing as that much government regulation. And then what happens is you stifle the economy, and when you stifle the economy and the market can’t move at the velocity that it normally moves at, the speed of doing business is slowed down—that kills jobs. And when you kill jobs, you kill people’s ability to earn an income and you hurt them a different way. So the very thing you set out to do with your regulations—your overregulation to protect people—has the reverse effect net when the smoke clears because you slow down the velocity of doing business to the point that business can’t be done at a reasonable profit margin, and so that slows down the amount of jobs that business or that industry can create.

Markets that are left to flow with a reasonable velocity where I can get there and buy my shirt easily, quickly, efficiently, I can choose never to do business with that company again easily, quickly, efficiently, if they aren’t handling things right, let the market punish rather than regulations being the answer to everything, then what happens is the economy booms.

I’m not for Ayn Rand anarchy. I get that Atlas shrugged. I get it, but this idea that zero regulation and that everybody’s just going to run rampant and people only function from their own personal self-interest is a theory, and it’s absurd because truthfully, the most profitable businesses over an extended period of time are those who don’t function in their own self-interest exclusively. They see their self-interest as being served by first serving their customer. I know if I help enough of you, I don’t have to worry about money. I know I’ll be able to sell books, radio ads, live event tickets, and if I’m really helping enough people and I really am doing it, then I don’t have to worry about money. That’s sanctified capitalism. It has a moral component to it. And that’s the only way to do business and win long-term.

Giving the sanctified capitalists that are out there—there’s a bunch of them, a bunch of us—free markets is the best way to go because it increases the speed, the velocity at which business is done and it gives more of you more opportunity not only for jobs but to open your own business as entrepreneurs as well. Overregulation kills all of that.

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