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"Free Market" Doesn't Mean "Pro-Business"

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Is a “free market” agenda the same thing as a “pro-business” agenda? Economists of a libertarian persuasion find this frustrating because our enthusiasm for free markets is often mistaken as enthusiasm for specific businesses or corporate interests. But just because something is good for General Motors does not mean it is necessarily good for America.

I propose that we dispense with the rhetorical conflation of “pro-business” and “free market.” Or at the very least we should understand the difference between the two. One of the key features of a free market is that it is a system of profit and loss. The “free” part of “free market” means free entry and exit. In a market economy, you are free to earn and enjoy enormous profits as your just reward for taking the world as you found it and producing some kind of new good or service that makes the world a better place. In economists’ parlance, you earn profits by creating wealth.

At the same time, you are free to enjoy enormous losses as your just punishment for taking the world as you found it and producing something that actually makes it a worse place. In other words, you earn losses when you destroy wealth and waste resources.

Here I will invoke my friend Steven Horwitz’s First Law of Political Economy: "no one hates capitalism more than capitalists." Matt Ridley says it well in his recent book The Rational Optimist, and I agree with him:

I hold no brief for large corporations, whose inefficiencies, complacencies, and anti-competitive tendencies often drive me as crazy as the next man.  Like Milton Friedman, I notice that ‘business corporations in general are not defenders of free enterprise.  On the contrary, they are one of the chief sources of danger.’  They are addicted to corporate welfare, they love regulations that erect barriers to entry to their small competitors, they yearn for monopoly and they grow flabby and inefficient with age.

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Consider the following scenarios and ask what the “pro business” and “free market” outcomes would be:

1.  A private company wants a patch of ground on which to build a hotel, a grocery store, a shopping center, or an office building. The “pro-business” solution is to seize the land via eminent domain and claim that the increased tax revenue is a public benefit (if increased tax revenue is going to be our standard, why don’t we compel labor force participation and make everyone sell their property to special interests?). The free market solution says “if the owner will sell to you, it’s yours, but don’t expect to be able to get government officials with guns to go get it for you.”

2.  A private company is struggling to make ends meet. It manufactures a product that no one wants to buy. The “pro-business” solution is to raise taxes and give the proceeds to the company or lend the proceeds to them at a reduced interest rate. The “free market” solution says “either get better at what you’re doing, or get out of the way of those who can.”

3.  A private company faces competition from foreign producers. The “pro-business” solution is to regulate or tax foreign products to make them more costly relative to the domestic product. The “free market” solution says “get better at what you’re doing, or relinquish the resources under your control to those who can better serve consumers.”

Do free-market solutions sound harsh? Perhaps. Is it cruel to leave the fate of a business up to the vicissitudes of market competition? I don’t think so. In a free market, people compete to see who can best secure others’ cooperation. Government, on the other hand, works by the threat of violence. If we’re going to use government to protect a business, we can only do it by threatening violence against its potential competitors.

I teach economics, and I write for a couple of different websites. If I were to insulate myself from foreign competition by hiring the mafia to prevent potential foreign economists from teaching classes that compete with mine or from writing articles that compete with mine, it would be a criminal act. Change “teach economics” to “make cars,” “mafia” to “government,” and “foreign economists” to “foreign car-makers” and you have flag-wrapped American industrial policy.

In a free market, you are welcome, and indeed encouraged, to enter the mousetrap industry if you think you can build a better mousetrap or find a way to make similar mousetraps more efficiently. The other side of that coin is that you will be encouraged to leave the mousetrap industry if it turns out that your mousetraps are not better, but inferior.

A “free market” agenda is not the same thing as a “pro business” agenda. Businesses should not be protected from competition, losses, and bankruptcy when they fail to deliver for the customer.  All three are essential to truly free markets and free enterprise.

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