A buzz word (or phrase) is one that just sort of rings true. Upon hearing it, we have an automatic sense of knowing what it means. "Free market economy" is a case in point.
Impressions can be deceiving, though. Many people who are prone to such a reflex, when asked to actually define or describe such a thing, find they have a more difficult time than the original confidence would have suggested.
Additionally, there is the problem that no one owns such terms. No one gets the final say over what the definition is. Two people with radically different definitions are just as entitled to use their own version.
Semantics or historical precedent, the resort of many, in reality solves little. Precedents are simply too abundant when sought by determined and clever partisans. There is no science of definition. It is an unfailingly subjective enterprise.
All this is to say that I have no illusions that my definition is irreproachable or objectively truth. I don't offer it under the delusion that no one can disagree. I offer it because I believe it is a definition that allows us to make an important distinction about the nature of the world.
I'd also recommend it because unlike some others it is not piecemeal or makeshift. It is rooted in principle. As such, there is value in the precision it offers. I of course have no control over what others think on that matter.
What is not in any way vague about these matters though is that in providing this definition, the terms of debate are set. Criticism of my attitude to - or conception of - a free market economy must address it as I define it. To substitute one's own definition at the locus of criticizing my claims about a free market economy is quite literally to miss the point.
So, working back to front, an economy is that part of a society concerned with employing resources: material, human or otherwise. It assumes nothing about how they are employed.
A market is a nexus through which actors trade those resources. (By "resources" I do not restrict my meaning to "natural resources" - e.g., stuff dug out of the ground. Rather I refer to anything for which anyone has a use. The term "goods" could be interchangeable with "resources.") A market does not assume the existence of money. A barter economy can still be a market economy.
The non-essential role of money is not to be confused with the elective nature of prices in markets. Prices after all are not based on monetary units (even if expressed in them where money exists). They are rather expressions of the consensus on the comparable valuation of resources. When money does exist, it is only one more resource. Like all the others, its value is determined through supply-and-demand driven trade. (For more on this, see my article on the Meaning of Money at the Fiat Currency Review.)
So a market economy is one in which value is determined by the relative supply of and demand for resources in the process of trading them. If a given resource is widely available and/or very few people want it, it will be valued less: it would take relatively more of it for most people to trade something they valued higher (i.e., it would have a lower price), than another resource less available and/or more widely in demand. Though, demand is always subjective .
This describes the workings of a market economy. More precision still is required to define a free market economy. "Free" might be regarded as interchangeable with "voluntary." A market is free when actors may enter or exit it at will: the freedom is freedom to exchange any resource desired with any partner both desired and likewise disposed.
We've now established three separate phenomena: an economy, a market economy and a free market economy. Let's illustrate the distinctions with reference to the case of marijuana. Most jurisdictions of the world prohibit selling and buying (not to mention growing and consuming) of marijuana. Police forces exercise their monopoly of legitimized violence to suppress trade in this resource.
It is a fact though that in many parts of the world the buying and selling of marijuana is a major part of the economy. It funnels income into areas that otherwise might not see nearly so much cash available to be spent locally.
The threat of violence by the police (being physically abducted and caged, surely qualifies as violence, whether you consider it legitimate or not) of course eliminates a free market in marijuana trading. Due to the high demand, though, nonetheless markets emerge to serve the needs of the prospective consumers.
If demand is sufficient, suppression of a resource, even by violence, will not eliminate the market for it. Threats of police violence do diminish the number of buyers and sellers in that market. And, since "trafficking" or "dealing" or otherwise holding large quantities is usually dealt with more severely, selling in particular is very dangerous. Dealing with this danger incurs elevated business costs. Those costs, combined with the violence-induced supply reduction, result in prices higher than the market would otherwise provide.
Government suppression of markets, thus, increases prices by reducing freedom to trade. This is not only true in the case of demonized (though victimless) crimes. All government tariffs, zoning, subsidies, bailouts, and most taxation and regulation, has the effect - and very often the intent - of reducing freedom to trade.
Virtually all the well documented corruption is a direct result of this dynamic. Politically well connected sellers influence government policy-making, curbing police powers in directions beneficial to their economic interests. Such crony mercantilism is the antithesis of a free market economy.
Impressions can be deceiving, though. Many people who are prone to such a reflex, when asked to actually define or describe such a thing, find they have a more difficult time than the original confidence would have suggested.
Additionally, there is the problem that no one owns such terms. No one gets the final say over what the definition is. Two people with radically different definitions are just as entitled to use their own version.
Semantics or historical precedent, the resort of many, in reality solves little. Precedents are simply too abundant when sought by determined and clever partisans. There is no science of definition. It is an unfailingly subjective enterprise.
All this is to say that I have no illusions that my definition is irreproachable or objectively truth. I don't offer it under the delusion that no one can disagree. I offer it because I believe it is a definition that allows us to make an important distinction about the nature of the world.
I'd also recommend it because unlike some others it is not piecemeal or makeshift. It is rooted in principle. As such, there is value in the precision it offers. I of course have no control over what others think on that matter.
What is not in any way vague about these matters though is that in providing this definition, the terms of debate are set. Criticism of my attitude to - or conception of - a free market economy must address it as I define it. To substitute one's own definition at the locus of criticizing my claims about a free market economy is quite literally to miss the point.
So, working back to front, an economy is that part of a society concerned with employing resources: material, human or otherwise. It assumes nothing about how they are employed.
A market is a nexus through which actors trade those resources. (By "resources" I do not restrict my meaning to "natural resources" - e.g., stuff dug out of the ground. Rather I refer to anything for which anyone has a use. The term "goods" could be interchangeable with "resources.") A market does not assume the existence of money. A barter economy can still be a market economy.
The non-essential role of money is not to be confused with the elective nature of prices in markets. Prices after all are not based on monetary units (even if expressed in them where money exists). They are rather expressions of the consensus on the comparable valuation of resources. When money does exist, it is only one more resource. Like all the others, its value is determined through supply-and-demand driven trade. (For more on this, see my article on the Meaning of Money at the Fiat Currency Review.)
So a market economy is one in which value is determined by the relative supply of and demand for resources in the process of trading them. If a given resource is widely available and/or very few people want it, it will be valued less: it would take relatively more of it for most people to trade something they valued higher (i.e., it would have a lower price), than another resource less available and/or more widely in demand. Though, demand is always subjective .
This describes the workings of a market economy. More precision still is required to define a free market economy. "Free" might be regarded as interchangeable with "voluntary." A market is free when actors may enter or exit it at will: the freedom is freedom to exchange any resource desired with any partner both desired and likewise disposed.
We've now established three separate phenomena: an economy, a market economy and a free market economy. Let's illustrate the distinctions with reference to the case of marijuana. Most jurisdictions of the world prohibit selling and buying (not to mention growing and consuming) of marijuana. Police forces exercise their monopoly of legitimized violence to suppress trade in this resource.
It is a fact though that in many parts of the world the buying and selling of marijuana is a major part of the economy. It funnels income into areas that otherwise might not see nearly so much cash available to be spent locally.
The threat of violence by the police (being physically abducted and caged, surely qualifies as violence, whether you consider it legitimate or not) of course eliminates a free market in marijuana trading. Due to the high demand, though, nonetheless markets emerge to serve the needs of the prospective consumers.
If demand is sufficient, suppression of a resource, even by violence, will not eliminate the market for it. Threats of police violence do diminish the number of buyers and sellers in that market. And, since "trafficking" or "dealing" or otherwise holding large quantities is usually dealt with more severely, selling in particular is very dangerous. Dealing with this danger incurs elevated business costs. Those costs, combined with the violence-induced supply reduction, result in prices higher than the market would otherwise provide.
Government suppression of markets, thus, increases prices by reducing freedom to trade. This is not only true in the case of demonized (though victimless) crimes. All government tariffs, zoning, subsidies, bailouts, and most taxation and regulation, has the effect - and very often the intent - of reducing freedom to trade.
Virtually all the well documented corruption is a direct result of this dynamic. Politically well connected sellers influence government policy-making, curbing police powers in directions beneficial to their economic interests. Such crony mercantilism is the antithesis of a free market economy.
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