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Hayek and the Meaning of "Free Market"

The current healthcare debate in Congress is only the latest example of America’s collective misunderstanding of what constitutes a “free market.”  Americans have largely been an individualistic, enterprising people.  Because of that, the political rhetoric to which Americans respond most positively is laced with free market terminology.  But when politicians from both parties all throw around words like “liberty,” “choice,” “competition,” and “private sector,” definitions become vague and muddled.  How should we approach economic issues when both sides of the aisle try to use free market rhetoric in pursuit of very different goals?  In times like these it is always good to examine our first principles; to take a moment to remember the purpose of the “free market” in the first place.  For that, let’s look at F.A. Hayek’s The Road to Serfdom, the masterpiece of one of classical liberalism’s favorite Nobel Prize-winning economists.  Hayek said this about the free market:

[The argument for a free market] is based on the conviction that, where effective competition can be created, it is a better way of guiding individual efforts than any other… not only because it is in most circumstances the most efficient method known but even more because it is the only method by which our activities can be adjusted to each other without coercive or arbitrary intervention of authority.[1]

When Hayek laid out his conception of the free market, the cornerstone was “effective competition.” This is because in a system allowing market players to compete with one another effectively (that is, without interference from outside the market, like from government or fraud), the players naturally progress in tandem with one another without a need for “coercive or arbitrary intervention of authority.”  In other words, competition is the engine that drives the market.  When allowed to work properly, government input on how best to progress is not needed because the free market will guide our individual efforts as we adjust to one another. 

Understanding that competition is the most essential characteristic of a free market also allows us to see the important difference between “free market” and “private ownership.”  Too many conservative voices in Congress and the media use these two terms interchangeably.  Hayek tells us that free markets involve competition and non-intervention, but private companies routinely collude with the government in a manner antithetical to competition—lobbying for policies that give market advantages to certain companies or industries but not others. 

On the one hand, the more government interferes with the market, the less free it is; that much is obvious.  When government tells companies how to run their businesses or enters the market itself, it destroys competition.  However, we have to be equally cautious in the other direction. When government allows itself to be co-opted by private companies that decide to pursue political agendas, it can do just as much damage to the market in the name of “pro-business” policy by failing to follow the fundamental principles of a free market.  The power of the market system is in competition, not in privatization.  When the law favors some businesses over others or limits the movement of commerce to favor some policy, that is not a free market, even though the government may not be injecting itself directly into the market as a market player. 

The all-too-frequent collusion of government and private business creates unfair legal advantages for certain favored firms or industries. These include such things as tax advantages, restrictions on entry to the market (remember the Wright Amendment and Southwest Airlines?), and the socialization of risk (which helped give us the housing crisis), among others.  When the success of a company’s stock price is directly correlated to the amount of money it uses to lobby Congress,[2] the market is no longer free, even though the companies are private.  This realization shows us two things.  First, that private ownership should not be our only focus when we talk about economic policy, because without “effective competition,” private ownership doesn’t give us the advantages of the free market system.  And secondly, while it is ultimately government’s responsibility to control itself and maintain a neutral market, private companies also have a responsibility to avoid anticompetitive political behavior so that competition can continue to drive society forward in the most efficient way.

Thinkers like Hayek who developed and championed the idea of the free market over the last few hundred years were arguing for an economic system based on competition.  Leftists who use “choice” as the justification for a government healthcare option are missing the point.  Moderates who suggest alternatives like non-profit co-ops and other pseudo-private entities are missing the point.  Conservatives who defend big businesses without regard to company political behavior are missing the point.  If we want to defend liberty and the free market, all of the market players must be on the same legal footing. And that means less government input all around.


[1] F. A. Hayek, The Road to Serfdom  (Chicago: University of Chicago Press, 1944), 41.



Principle Spotlight: Hayek and The Rule of Law

Essential to liberty is the ability for humankind to order and plan its future within a framework of reliable laws.  The government that is unpredictable, changes laws at a whim, favors one group over another--creates an environment in which man is not free to make his own path.  In contrast, an understood framework allows humans to create and innovate and take on new ideas without fear of the rules changing and throwing plans off course.  Thus, the rule of law is the idea that man is governed by laws that are understood by the community and enforced equally by the government—a playing field where, as long as one stays within the boundaries, one has the ability to thrive.

Friedrich A. Hayek in The Constitution of Liberty described the Rule of Law as a meta-legal principle, binding the lawgiver and the law through moral tradition.(1)  To Hayek then, the rule of law means:

government in all its actions is bound by rules fixed and announced before hand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge. (2)

1. F.A. Hayek, The Constitution of Liberty, (Chicago:  The University of Chicago Press, 1960), 206.

2. F. A. Hayek, The Road to Serfdom, (Chicago:  The University of Chicago Press, 1994), 80.

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