Free Market Falsehoods

October 17, 2013

Sandy Ikeda, an associate professor of economics at Purchase College, SUNY, lays out a few timeless falsehoods about the free market (of course, there are plenty more).

Falsehood: The free market creates scarcity and higher prices.

  • Reality: In any economic system the quantity of a good will typically not be enough to satisfy demand when the price is zero. In a free market, in which people trade their legitimate claims to those resources, prices will tend to rise or fall to the level where the quantity supplied equals the quantity demanded, and in that way prices help us to cope with scarcity.

Falsehood: The free market means the government gives businesses special privileges.

  • Reality: The free market is free precisely because it denies special legal privileges to any person or group.

Falsehood: The free market requires that all valuable resources be privately owned and traded on markets.

  • Reality: Sometimes the alternatives to individual ownership just work better, such as when we "exchange" favors with family, acquaintances, and sometimes with strangers without the need for formal markets and market prices.

Falsehood: The free market is pro-war.

  • Reality: War and the government interventions that inevitably accompany it restrict markets and free association, make it more costly for most people to buy and sell, reduce the purchasing power of households and businesses, and disrupt the peace that is necessary for a thriving free market.

Falsehood: The free market is always efficient.

  • Reality: The real world is populated by real people who don't have complete information, who may have bad information and who may just make mistakes. An "ideal" economic system is not one in which no one ever makes a mistake; it is one in which the mistakes that people inevitably make are corrected as effectively as possible.

Source: Sandy Ikeda, "7 Falsehoods about the Free Market," The Freeman, October 11, 2013.

 

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