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The Difference Between Regulated Markets and Free Markets

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Who are the worst enemies of free markets? Probably (and sadly) proponents of markets. It is as unfortunate as it is sad that market advocates tend to refer to anything that works in the economy as due to 'free markets' whereas anything that is not good isn't.

That's not quite how it works.

Market exchange happens even if markets are not free.  

There was trade, both 'legit' and black market, in the USSR.  Markets work because, in any uncoerced exchange, all parties to the trade gain. These are markets, simply put, whether or not they are regulated, taxed, restricted, or in other ways tainted and distorted.  It's always the case that exchanges that are voluntary make parties better off. But the exchanges are contingent on the institutional framework within which they take place.

In other words, what exchanges take place, and which do not, is affected by how markets are regulated.

The black market sees certain exchanges, and will not see certain others, because it is heavily sanctioned by (and, indeed, its existence depends on evading) the state.

Similarly, the heavily regulated airline industry sees plenty of exchanges--there is a market. But neither example is a free market, which means a market that is not distorted by arbitrary or political restrictions. The 'black' market would be 'white' had it not been banned, and it would work very differently. The airline/air transportation market would work very differently had it not been subjected to thousands of restrictions and other exogenous (from without) attempts at steering, planning, and forcing certain results.

Similarly, the way Wall Street (the finance market) works is contingent on the massive regulations that are imposed on it--a free market in finance would be different from Wall Street.

How do we know? Because regulations have an effect and are designed to have some effect.

Of course, they usually don't have the intended effect, but they have some effect and therefore change the processes, mechanisms, the actual exchanges carried out, and thus the outcome. Removing (or adding) one regulation changes how that market (like any market) works. The more impact any regulation has on a market, the further away the outcome will be from what would be the case without regulations.

Thus, the more regulations affect the outcome, the further the outcome will be from that which would be created by market actors themselves.

This sometimes contested point is actually obvious. Regulators and those advocating regulations want to change how those markets work--they want to do away with certain exchanges and control the outcome.

Regulations affect markets, period.

That's how they are used, why they are used, and also advocated by many. To claim they have no effect is ridiculous. Yet if they do have an impact, albeit rarely the intended result, it follows that a regulated market cannot be free.  Regulated markets can be more or less regulated, but neither 'more' nor 'less' restrictions placed on market exchanges make those exchanges free of restrictions.

A free market, one in which participants voluntarily trade and exchange the way they themselves see fit, unrestricted by third parties (those who are not directly involved in the exchange), necessarily must be without arbitrary restrictions and regulations.

To say that the 'black' market is a free market is an error because even if the exchanges are voluntary they are heavily impacted by regulations (here: prohibitions). To say that airlines are actors in 'the free market' is equally wrong--there's hardly anything free about this market, which suffers from the burden of a mammoth body of regulations.

Whether you buy a plane ticket, these companies' hiring and investment decisions, etc. are still voluntary exchanges. But they're restricted exchanges; they do not take place on a free but (highly) regulated market.

So why do proponents of markets claim that the accomplishments of the airline industry are due to the 'free market'? They are certainly results of a market, but a heavily regulated one -- one in which market actors have not been allowed to have a say, that is, they have not been allowed to engage in the exchanges they would have chosen.

To say that this is a free market is at best a mistake, but more like a lie.

Markets work, they always do. But their results differ. And regulations place restrictions on how markets may work. There's only one kind of free market, and it is one that does not suffer from restrictions--because restrictions placed on it make it unfree.

Why self-proclaimed advocates of the free market call unfree markets free, and so confuse the real for the ideal, is as perplexing as it is counterproductive.

Stop it, you're giving away the game.

Formatted from Twitter @PerBylund

Contact Per Bylund

Per Bylund is assistant professor of entrepreneurship & Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. Website: PerBylund.com.

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