This post continues an occasional series discussing excerpts from Cambridge economist Ha-Joon Chang’s excellent and very readable book 23 Things They Don’t Tell You About Capitalism. Here I consider his ‘Thing 1’: there is no such thing as a free market. This statement seems iconoclastic, but then so is much of the book. To remind readers, Chang supports a reformed capitalism which delivers more widespread prosperity than in many countries, both rich and poor; he is no socialist. I think it would be fair to say that he is heterodox and moderately left-wing, favouring state intervention in many areas of the economy. In my view there is little wrong with that, since he is an engaging and often amusing thinker and writer.
But what of the free market? Chang claims that there is no such thing, since every market under capitalism is propped up by regulations which define its scope and operation, and restrict freedom of choice. Some economists’ claims to be defending the free market from government intervention is thus false, since every market is a political construct. Thus free market economists are as politically motivated as anyone.
As an example, Chang cites the Cotton Factories Act of 1819, which prevented cotton factories from employing children under 9. Older children (up to 16) would be restricted from working longer than twelve hours a day. And the legislation was limited to cotton producers, since their factories were deemed to be particularly hazardous to health. The law caused huge controversy, with opponents claiming that the sanctity of the market and freedom of contract were being undermined. Supporters favoured reducing the incidence of child labour and supporting children’s rights not to work. So was the market then free or excessively regulated by an interfering government? It seems that in this case at least, the view one takes is subjective.
In rich countries nowadays, most people happily accept regulations banning child labour. We have become so used to it that we barely perceive this as ‘excessive’ state intervention. We also do not question environmental regulations which limit pollution. This is market regulation, but it has become widely accepted, as we might recognize its benefits to our health and safety.
The minimum wage is an example of legal intervention in the labour market. The central bank sets short term interest rates, and these have a strong influence on longer term market rates, which in turn affect borrowing for consumption and investment, as well as speculation. There are regulations governing production (what can be produced, how and by whom), and consumption (consumers rights etc). In many cases we do not see these as a problem.
Regulations can even provoke violent conflict, as in the American Civil War over the slave trade. And when facing the potential collapse of the financial system in 2008, George W Bush argued that state intervention, which included nationalising parts of the economy, was justified as he was merely acting to preserve the system of free enterprise!
So markets seem to be inevitably subject to political and social laws, not just economic ones. When someone argues that they want to remove particular laws, we should look carefully at who gains and who loses from the change, where the argument is coming from and its subjective nature. In other words we should examine the politics as well as the economics and try to see how the two interact in processes of social change.
The market is an institution created by man. It existed long before capitalism came into being, and it is important to distinguish the former from the latter. The market is an institution that facilitates exchange, but perhaps more importantly, it helps to stimulate economic change and is part of the dynamism of modern capitalist society.
The ‘freedom’ or otherwise of the market will remain a political issue and often be highly subjective, leading to passionate debate on the evolution of regulations. Thus arguments supporting the ‘free’ market are as political as those which propose to regulate it in some way.