September 29, 2006
Free Markets II Posted by John Steele Gordon at 03:45 PM EST A free market, at least in my definition, is one where buyers and sellers can freely enter and leave and can charge or offer what they think the market will bear.
But a free market does not mean a market without rules. No one wants sellers of medical services to be unlicensed or sellers of unskilled labor to be six years old or buyers of goods and services to be excluded because of race. But the rules must be uniformly applied and fair. All too often they are not. Rent-seekers, as they are called in economics, are always after the government to put a thumb on the scale for their benefit.
Organizations frequently seek to maintain monopolies or cartels by getting governments to enforce unfair or unnecessary rules. Optometrists in New York State, for instance, fought tooth and nail against allowing drugstores to sell reading glasses in standard strengths, as they could in most other states. They claimed that all sorts of horrors would follow if presbyopics were not examined first before having these glasses prescribed for them. Since they lost that fight several years ago, the only result of allowing people to buy reading glasses unassisted in New York State has been a considerable decline in the cost of the glasses.
Further, there must be cops on the beat. Markets are inherently unstable, as individuals will always pursue their own interests and some of them will always be willing to cheat. The more that is at stake, the more people who will be willing to cheat. (Imagine what the Super Bowl would turn into if those guys in striped shirts weren’t on the field.) Some mechanism must safeguard the interests of the market as a whole. The best example of what happens when there are no referees on the playing field of the free market—regardless of how level it is—is Wall Street in the 1860s, a topic I mentioned today in an earlier post.
Wall Street had been a small and parochial affair before the Civil War, and the rules, such as they were, were enforced mostly by peer pressure. If individuals cheated too much or too frequently, they found no one willing to trade with them. But by the time the war ended, Wall Street was the second largest securities market in the world, second only to London. With trading taking place not only at the New York Stock Exchange but also at the Open Board of Brokers, out on Broad Street itself (the so-called curb market), and even uptown at the Fifth Avenue Hotel long into the night, no Wall Street institution was able to enforce the rules.
Neither was government, because the federal government did not then have any role in regulating markets, and the city and state governments were mired in corruption of breath-taking extent. In 1868 the New York State Legislature actually passed a law the effect of which was to legalize bribery. The English Fraser’s Magazine reported that year that “in New York there is a custom among litigants, as peculiar to that city, it is to be hoped, as it is supreme within it, of retaining a judge as well as a lawyer.”
The result was Wall Street’s Wild West days. It was capitalism red in tooth and claw. It was very entertaining for those who could merely watch, but brokers knew it was no way to run a railroad. When the New York Stock Exchange merged with its largest (indeed, larger) rival, the Open Board of Brokers, in 1869, the new organization became powerful enough to enforce the rules needed to make Wall Street a safe place for honest men to do business.
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