The Virtues of Free Markets
August 2, 2011
Free markets have many virtues. Arguably, the most recognized is the expansion of individual choice and thus freedom -- through mutually beneficial exchange. Still, free markets promote other important virtues that have heretofore received scant attention. Specifically, through fostering an indefinitely-lived series of exchanges, free markets create a future promoting integrity and trust. This is because the more the future matters, the better behaved are individuals in the present, says Mark A. Zupan, dean and professor of economics and public policy at the University of Rochester's William E. Simon School of Business.
Free markets -- based on private property, freedom of contract, the rule of law and individuals' pursuit of their interests -- represent the most effective means for promoting integrity and other forms of cooperative behavior through their ability to foster repeated, mutually beneficial exchange as well as specialization.
- Free markets, based on clearly defined and enforced private property rights and the liberty of individuals to pursue their interests, maximize the opportunities for repeat interaction across time, products, places and people.
- By creating the broadest possible opportunities for repeat interaction and thereby a future, free markets have an edge, relative to other systems for organizing economic activity, when it comes to promoting prosperity as well as the practice of integrity and other cooperative virtues.
Stressing free markets' relative benefits, of course, does not mean that the system is flawless. As is well known, free markets can fail to satisfy the conditions for Pareto optimality (a situation where economic resources and output have been allocated in such a way that no one can be made better off without sacrificing the well-being of at least one person) in cases of market power, imperfect information and externalities/public goods (when private property rights cannot be fully specified and readily enforced).
Any analysis of a particular economic system's efficacy, however, must inherently be relative to other possible options. Thus, the potential costs of market failure must be weighed against the costs of government failure associated with approaches involving greater central planning, says Zupan.
Source: Mark A. Zupan, "The Virtues of Free Markets," Cato Journal, Summer 2011.
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