In common usage, people talk of regulation interfering with free markets.
This implies that the more regulated a market is, the less free it is. And that reducing regulations makes markets more free.
But if you take this line of thinking to it’s logical extreme, you get to an absurd conclusion.
That the freest markets are ones with no regulation.
A linguistic trap1 is a phrase which in order to be understood requires accepting an idea that is misleading or distorted.
Regulations is another word for rules.
ALL markets have rules. There are no exceptions. Markets can not function unless people know the rules. Even in societies where disagreements are arbitrated with AK47s, there are rules.
So all markets have regulations, and hence all markets are regulated in some ways.
Which means the problem with free markets, as the phrase is commonly used in our culture, is that THOSE free markets don’t actually exist.
Different people have different views on this, but I think the place to start is with a book titled “Free Market - The History of an Idea” by Jacob Soll.
I wrote a Substack article last year which is essentially a review of this book2, but to provide a VERY terse summary, the phrase has meant different things to different people at different times.
And… the idea that free markets are free of government intervention is historically new. It seems to have emerged around the time of WW1.
The material wealth of a society is the aggregate of all the goods and services commonly used by the people.
But, in every society, there have been (and are) people who create value by producing goods and services, which involves direct investment, while simultaneously other people extract value by diverting “rents” away from that direct investment.
The diversion of rents away from direct investment is called rent extraction.
Once upon a time rents meant literally the rent of land with or without buildings, but over time it’s come to mean any payments required by rights of ownership.
Today things that can owned which generate rents are land, stocks that pay dividends, bonds that pay interest, shares of securitized debt (for example - mortgage backed securities), etc.
People who pursue receiving those rent payments are known as rentiers or rent seekers.
According to economist Michael Hudson, prior to WW1, markets were to be free FROM rent extractions, and around the time of WW1 the usage was flipped to mean markets were to be free FOR rent extractions3.
“The mere possession of monopoly power and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system.”
This was written by Antonin Scalia in the 2004 Supreme Court decision in Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 US 398, in the first paragraph of Section III4.
Personally, the idea that free markets can and should restrain competition just blows my mind.
By being more precise with our language, a part of which is to stop using the phrase free market.
We should say what we mean instead of using that phrase.
If to you, “free market” means:
More competition
Less concentrated market power
Then say so directly, and avoid the use of the phrase “free market” altogether.
When the phrase “free market” can mean the exercise of monopoly power, the phrase has become worse than useless.
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