Free markets

In my previous post I argued that the European Union can only convincingly promote values of freedom, of liberal democracy and the respect for human rights beyond its borders if it makes “clear that it values democracy and human rights in the rest of the world (not just at home) more than it values low prices of the goods it imports.” However, before turning to the question how it can do that, in today’s blog I attempt to work out the values of democracy and human rights and of the “free market” and “competitiveness” can best be connected.

Competitiveness is commonly understood as the ability to sell a product at a lower price than the competitors (for example as a result of lower production costs) or the ability to sell higher quality products at a higher price (for example as a result of innovative technology). The “free market” is often reduced to prices not being set by the state, most products being produced and sold by private businesses, and at least two companies competing to sell similar products. However, even according to such minimal definitions, many markets are not free at all. For example, a very large portion of fossil fuels is mined and sold by state enterprises, and in many sectors there are monopolies or quasi-monopolies that impose their conditions on all participants in a market (for example, in large-scale trade of many agricultural commodities, agrochemicals and seeds).

However, there are also more demanding definitions of the “freedom” of a market, according to which there are not many truly free markets. Is the book trade free if Amazon establishes its European headquarters in Ireland and thereby pays substantially lower taxes than smaller bookstores all over Europe? Can workers freely negotiate over the price of their labor if they have to suffer hunger if they lose their job, but their employer can easily find someone else to do the job – perhaps in other countries or continents? Can farmers freely decide to carefully tend to their land and soil, to treat their animals reasonably well, if they end up producing at somewhat higher cost than their competitors? The so-called free market is full of constraints from which only few market participants can extricate themselves. Nothing shows this more obviously than business literature that prescribes in very authoritarian language what you “must” do in order to survive in the market. In the end, the most ruthless market participants set the prices and thereby the conditions by which everyone else must abide.

Some advocates of “free” markets wish to “free” markets by abolishing virtually all legal restraints. This is called “deregulation.” To the extent that such efforts are successful, this means that everything is sacrificed to the market: clean air and water, soil fertility, the physical and psychic health and old age security of working people, and so much more. After all, in the absence of regulation, anyone who does not care about all these things can sell their products at a lesser price and gain market share. This does not change if people who are both well-off and well-meaning try to shop as socially and ecologically responsibly as tehy can. Such behavior only enables niche markets for the goods produced in this way; the mass market is not at all affected.

In fact, laws and regulations are necessary for competition to motivate businesses not only to use resources effectively, but also to take care of them, not only to use human labor for some useful end, but also to care for the people. Unregulated competition leads to a mentality of taking without ever wanting to give back. Ultimately, this leads to the ruin of everybody involved, because the ecological and social conditions for life are destroyed – without which no market can exist. Rules are essential.

The more is at stake, the more rules are necessary. An analogy to sports can make this clear. A football match on the neighborhood pitch requires only few rules, two backpacks can serve as goalposts, referees are not needed, offside rules are interpreted rather casually, etc. However, the higher up one goes to local and regional leagues, to national amateur and professional leagues and finally to international football, the larger and more detailed the rule book becomes. Four referees, video review, detailed examination of the minutiae of each handball and offside position etc. are only found in the highest leagues, where incredible sums hang in the balance in each match. It is similar in markets. The more world-encompassing markets are, involving a sheer endless number of goods the production of which can hardly be monitored from a distance, the more important is a comprehensive set of rules.

Thus, a market is not free if there are no rules. Instead: a market is free if everyone involved can freely participate in working out the rules. Free negotiation of rules is only possible if everyone has the right of free expression, there is freedom of the press, if all people can freely associate together in unions, parties, associations, non-profits and interest groups in order to collectively defend their rights, if the courts and regulatory agencies actually enforce the agreed-upon rules, if there is protection from political violence. That is, free negotiation of market rules is only possible in the conditions of a democratic polity with a reliable legal order. These conditions nowadays are only fulfilled in democratic states with a stable legal system. From this it follows: in the absence of a democratic state and the rule of law, there is no free market.

I repeat: in the absence of a democratic state and the rule of law, there is no free market.

Or put somewhat differently: democracy is a necessary, but not sufficient precondition for a free market. It is not a sufficient condition because firstly the mere existence of a democratic system does not at all guarantee adequate political and societal participation by all social groups, and secondly negotiation processes of this kind take a long time and can take generations. Thirdly, market conditions have to be renegotiated constantly because of technological change, changes in the availability of all kinds of resources, changing threats to ecosystems etc.

That is, free markets are a utopia from which we are far away. To the extent that we hold on to the concept of free markets, it is worth making the effort to make markets incrementally more free. The same applies to all other social institutions that structure our life together. Any institution can only be free if the rules pertaining to it can be freely negotiated and renegotiated. As a reminder, by far not everything is determined by markets. Transport infrastructure is generally managed by the state, public transit is usually managed by local authorities. Health care in the UK is managed by the NHS and in many other European countries by state-run insurance schemes, retirement benefits are to a large extent provided by public authorities (e.g., the Social Security Administration in the US). In addition, we provide for many of our needs individually or in households. Universal education anywhere in the world has been made possible by means of public schools (which in England and Wales are called state schools). It is thus part of the freedom of a country that the political system allows free negotiation about which aspects of life are governed by which social institutions.

In international trade, goods and services are traded which are produced under extremely diverse circumstances. In many countries, these circumstances have little or nothing in common with “free markets” as I defined them here. In the absence of binding rules to protect the environment and human rights, those products which were produced without regard to the environment and human rights can be offered at a lower price. Their sellers thus enjoy a competitive advantage.

Why are there nonetheless some countries with internally relatively “free” markets? Because these countries enjoy a privileged standing in world trade, usually due among other things to a history of colonialism. These countries can to some extent avoid destructive competition – at least temporarily.

But freedom can not be a luxury – because luxury is a privilege, not freedom.

Therefore, people in countries with relatively free market conditions need to think about how they can organize trade with relatively less free countries in such a way that conditions for greater freedom will tend to spread ever further, rather than contracting.

This will be the starting point for my next blog entry.

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