The ideas of the free market have dominated the economic discourse since the 1970s, in the aftermath of the Keynesian economic model, which favored heavy government regulation. The theory proposed by the neoliberal economists, led by Milton Friedman, is that markets have the ability to self-regulate and that economic crises are largely caused by the imbalances brought by government intervention.
The questions about the intrinsic value of economic freedom versus community good have been rising since the housing bubble and the world economic crisis of 2009. The purpose of this paper is to analyze various views and theories on free markets and government regulations.
Capitalism and Freedom, According to Milton Friedman
According to Milton Friedman, the economic foundation plays a two-part role in enabling freedom. Firstly, capitalism as in the freedom of economic arrangements is one of the integral parts of freedom itself, as it is commonly understood (Friedman 1962, 10). Secondly, capitalist economics is necessary for achieving political freedom for everyone. Friedman states that the freedom to conduct economic arrangements is key to political freedoms, as they serve as a means to an end in dispersing and concentrating political power (Friedman 1962, 10). To support his claims, the author states that the relationship between a free society and a free market is historically proven, as there has never been a free society without a system akin to competitive capitalism.
Why Government Regulation is Bad?
Friedman has two arguments against government regulation. First, he sees it as curtailing of personal freedom to conduct appropriate economic arrangements as one sees fit. If this freedom is taken away, it influences political freedom, thus resulting in less freedom for the entire society (Friedman 1962, 11). Secondly, he believes that the majority of government regulations and enterprises are inefficient.
According to Friedman, the government has no personal interest in the success or failure of the enterprises it regulates. Therefore, it cannot make any decisions for said enterprises. The purpose of the government is to provide an even playing field for all enterprises to freely compete in. At the same time, government regulation and support of economically inefficient activities eventually lead to an unbalanced system (Friedman 1962, 15).
The Downsides of Deregulation
According to Kuttner, complete deregulation led to a drop in quality, overall economic efficiency, security, and inequality of labor (Kuttner 2008, 83). The author is separating the terms of regulated competition from complete deregulation as well. In his opinion, the purpose of regulation is to eliminate certain parts of the competition that could negatively affect the customers or the workers (Kuttner 2008, 84). In contrast, Kuttner presents how deregulation affected several areas of the economy, such as airline, transportation, and financial industries.
Regarding finances, Kuttner says that financial deregulation coupled with a naïve perspective of trade between America and China in the 1980s has resulted in the current trade dependency from China. Companies were not regulated or obligated to preserve national businesses and communities, which resulted in the deterioration of the local production sector. The absence of regulation, as Kuttner states, is the reason for the growing inequality, insecurity, and financial crises (Kuttner 2008, 86).
Why is Self-Regulating Market Not Sufficient?
According to Etzioni, self-regulation of the market is not sufficient, namely because it places the responsibility to regulate the market from the shoulders of the government, which is well-funded and well-equipped to enforce the standards of quality and labor, unto the shoulders of the average customer. According to the theorists of an unregulated free market, the customers are supposed to be aware of not only a company’s quality standards and methods of production, but also of their wages policy, corporate responsibility, ecological friendliness, and numerous other positions that make up a company’s public image (Etzioni 2009, 42).
Etzioni proposes a political reform to free regulations from the regulated. According to the author, many companies lobby their interest in the Senate by offering jobs and payouts to various senators (Etzioni 2009, 45). They are also capable of funding the political campaigns of local candidates. One of the key suggestions for fixing this issue is to limit the amount of money available to candidates to drive their political campaigns. That way, even if the candidates were being lobbied, they would not have a financial advantage over their opponents.
How Does the Free Market Undermine the Community?
Stephen Marglin’s essay analyzes how global markets have been detrimental to various communities worldwide, in a plethora of different ways. The author recognizes that not all communities are made equal. In addition, he says that a sense of a community undermines individual freedom to some degree. However, his argument is based on the statement that humans are social creatures and that a sense of community has an intrinsic value within itself, that businesses and markets have to account for, but do not (Marglin 2008, 19).
A globalized economy suggests high levels of mobility in order to guarantee employment. The movement of different companies from the USA to China managed to destroy local economies and communities. In addition, the expansion of businesses in China managed to damage local communities by negatively affecting their ecosystems and influencing the labor market in a negative way (Marglin 2008, 21). Global markets undermine communities as outdated and deficient, instead of creating atomized individuals. This atomization is the cause of the ongoing depression outbreak in the USA, as people do not have a sense of belonging the way they used to.
The politicization of the Role of the State
The reason why different economists view the appropriate role of the state so differently is that they have different preconceptions about the nature of markets and the nature of people operating these markets. Many proponents of the free market view them as the ultimate good because the only alternative to them is collectivism and communism (Wisman 1986, 1). Many supporters of the American dream come from countries that operated under a tyranny dressing in the robes of socialism.
The supporters of the regulatory power of the government, on the other hand, see free markets as a field where some people can achieve their own selfish interests at the expense of others. Another point of contention is regarding what should be considered a right. Social-inclined economists have a wider set of properties and services considered public, whereas capital-inclined economists replace these goods with the abstract notion of freedom (Wisman 1986, 3). Lastly, many economists disagree on the purpose of economic prosperity and on whether the individual benefit should outweigh the common good or the other way around.
As evidenced by history, there is no such thing as an ideal economic system. A heavily regulated economy is less efficient and can easily devolve into tyranny, whereas unregulated markets have caused the majority of large and small economic crises in the 20th and the 21st centuries. Every time, millions of people suffered while the system balanced itself out. Finding the balance between opposing economic and political views is difficult due to the heavy politicization of the matter as well as conflicting views on what has greater value – the individual or the community. This question, however, could not have a definitive answer, as it lies in the domain of ethics and not economics.
Etzioni, Amitai. “The Free Market versus a Regulating Government.” Challenge, vol. 52, no. 1, 2009, pp. 40-46.
Friedman, Milton. Capitalism and Freedom. University of Chicago Press, 1962.
Kuttner, Robert. “The Squandering of America’s Assets.” Challenge, vol. 51, no. 5, 2008, pp. 78-90.
Marglin, Stephen. “Why Thinking Like an Economist Can be Harmful to the Community.” Challenge, vol. 51, no. 2, 2008, pp. 13-26.
Wisman, Jon D. “Keynesian Economics and Economists’ Views on the State.” Forum for Social Economics, vol. 16, 1986, pp. 1-15.