Academic journal article The Cato Journal

The Virtues of Free Markets

Academic journal article The Cato Journal

The Virtues of Free Markets

Article excerpt

Free markets have many virtues. Arguably, the most recognized is the expansion of individual choice--and thus freedom--through mutually beneficial exchange (see Bauer's definition of economic development in Dorn 2002: 356). This proposition is at the heart of the enduring impact of Adam Smith's Wealth of Nations ([1776] 1937) which aptly spells out the benefits of the Invisible Hand for citizens and societies.

In Capitalism and Freedom (1962), Milton Friedman articulates why the economic freedom at the heart of free markets is also a precondition for political freedom. Freedom of expression is not possible when the means of production are under government control and individuals lack the economic means to sustain themselves and their points of view.

This article argues that free markets promote other important virtues that have heretofore received scant attention. Specifically, through fostering an indefinitely-lived series of exchanges, free markets create a future promoting integrity and trust. This is because the more the future matters, the better behaved are individuals in the present. Therefore, rather than being castigated, as they so often are in the popular media and political arena, for encouraging immorality, free markets should be praised for fostering integrity and cooperative behavior through their promotion of ongoing mutually beneficial exchange.

The two sections that follow provide a positive definition of integrity" and show how it differs from the normative concepts of morality, ethics, and legality. They also explain the fundamental reason free markets foster integrity. The rationale is demonstrated through a simple but powerful game-theoretic construct: the prisoner's dilemma. Through the prisoner's dilemma, we can see why repeated interaction between individuals promotes integrity as well as other forms of cooperative behavior.

While all economic systems feature some repeat interaction, well-defined and enforced rights to private property increase opportunities for repeat interaction. Relative to other forms of organizing economic activity, therefore, free markets are superior at promoting integrity, and other cooperative virtues as well as prosperity.

Empirical observations from a variety of settings supporting this article's proposition concerning the positive relationship between free markets and integrity are provided. The evidence demonstrates the link between the importance of the future and the practice of integrity in the present. Such a link also promotes cooperative behavior in general and thereby certain normative virtues from the spheres of morality, ethics, and legality. The evidence indicates why so much of how free markets are commonly conceived, in the popular media and elsewhere, needs to be recast. The reasons why free markets are so often misunderstood when it comes to the promotion of positive and normative virtues are explored.

There is, of course, a potential Achilles" heel in the argument about the beneficial effects of repeated interaction. This prospective flaw revolves around the fact that the repeat interaction typically involves a different and ever-broadening set of players. The means by which markets address this matter are discussed.

A Positive Definition of Integrity

Social scientists typically relegate integrity to the domain of normative analysis. Akin to concepts such as morality, ethics, and legality, integrity has been assumed to involve a nonscientific value judgment that cannot be proved right or wrong by facts, evidence, or logic. Rather, such assessments are taken to stem from the value system of the person making the judgment. Normative analysis contrasts with positive analysis, which is capable of providing a scientific, objective assessment (quantitative and/or qualitative) of the outcomes associated with any given action.

Yet, as Erhard, Jensen, and Zaffron (2010) show, it is possible to bring the concept of integrity into the sphere of positive analysis. …

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