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What does it mean to be “free market”?

A good question from Adam Ozimek.   I’m not really interested in whether or not Paul Krugman is “free market”–he could be a communist for all I care–but it does beg the question, “What is a free market (or at least) what does it mean to the average person?”

My guess is that “free market” means different things to different people.   And before we can answer the question what a “free market” might be, we need to understand what a “free market” means to different people.

Different meanings for different groups

For the record, my own view is that the words “free market” is never well-defined: it is always an everywhere a misleading concept, the power of the concept comes from its ambiguity.

  • For technocratic progressives:  For people like Krugman or me (but not me) ; when they say “free market”, I think they mean it in the mechanism design sense.   The market –when allowed to do its thing–is a powerful tool.   Nothing more, nothing less.   The market (in this sense) can do great things under the right circumstances, but this means nothing for either regulations or tax rates.   Regulations and taxes “change the game”, but not the usefulness of the tool.
  • For the rest of the progressive community:  Speaking for people who are not too much like me;  I would venture that when the typical progressive hears the words “free market” they think of exploitation by the rich and powerful.   There is some truth to this.   A market without redistribution will tend to concentrate wealth and power.   For these, regulations and taxes are buffers against the concentration of wealth and power so that unlike the technocrats they see a tension between regulations, taxes and free markets.   The irony is that many progressives have bought into the libertarian view of free markets.
  • For libertarians:  Speaking for people like Adam (but not necessarily Adam, and definitely not me); I would guess that “free market” is ipso facto the absence of constraints on economic behavior.   For these, taxes and regulations are anathema to free markets.   How can markets be free if they are taxed?   How can markets be free if someone is regulating their activity?
  • For non-libertarian conservatives:  I think conservatives have the most diverse views of the meaning of “free market” and the hardest views to pin down.  For some religious conservatives, especially the prosperity bible types, the “free market” is a kind of proxy for God’s Favor–markets give God a free hand to punish the wicked and reward the righteous.   There’s something similar with business conservatives–the rich are ipso facto the most Worthy and most Important for the health of the economy.   The market is what makes sure those are the ones who are rewarded, rather than… others.  For these, taxes and regulations undo the work of the market–rewarding the slothful and punishing the virtuous.

I’ve left out technocratic conservatives (in part I just think that group is too diverse to capture in one paragraph).

When Krugman calls himself “free market”, who is he talking to?

Not to people like me, I’m guessing.    For someone like Krugman (or me) being free market is not a description, it is a fact.   Markets are powerful tools and we are happy to use them as tools.   If you have a hammer, why not use it to pound some nails?

As a rhetorical device, though, I think I can see Krugman’s true targets.

First, the non-technocratic progressive community has (ironically) bought into the libertarian view that “free markets” are directly at odds with taxes or regulations.   This is ironic because seeing the ravages of the “free market” many of these see free markets as something which must be fought.   To these, Krugman is saying; don’t hate the hammer.

I think Krugman is also speaking to the libertarian community.   To these, he is saying; we have something in common.   He is appealing to middle ground.   When he says that he is a Welfare State Capitalist, he is doubling down on the middle ground.   Denmark really is a nice place to live, he is asking; is it so terrible to move in that direction?

To conservatives, I think he is saying; you need to reconsider your theory of justice.   By pairing free markets and social welfare he is saying that the market itself will not produce justice, but we can build a system which will.   To these, he is issuing a challenge.

I don’t know what Krugman is thinking, of course, but I would guess that his rhetorical strategy does all of the above, whether he planned it to or not.

Is Krugman lying?  Can you be “free market” and support 70% marginal tax rates?

Of course, my answer is yes.   You can be “free market” and support 100% marginal tax rates, or 110%.   It doesn’t matter.    Taxes change the rules of the game, maybe for the better or maybe for the worse, but the game is unchanged.

Everyone is entitled to exchange what they have , but no one is entitled to name their own price for the exchange.   I am free to sell my car, but I have no right to claim $1M in exchange.   If the price is set by an un-taxed market or if the price is set by the market with a tax, what difference should that make?   I can still sell my car, although it may no longer be worth the effort.   It may also not be worth effort if the market is flooded with quality, cheap new cars.

To put it succinctly: no one is entitled to surplus.

[Edit]  I also endorse this response from Karl Smith.

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