Libertarians like to think of themselves as economically literate, at least when compared to other political groups, and for the most part, I believe that’s true. But there are at least three mistakes that I keep hearing even libertarians make when talking about the free market.
Mistake #1: “The free market doesn’t need regulation.”
One of the dangers of talking with someone who disagrees with you, or sometimes even with someone who seems to agree with you, is that you talk past each other. I find that’s true in discussions about regulation.
Even among libertarians, whether and to what extent we need government regulation — for example, to prevent environmental catastrophe, to prosecute violent criminals, to defend against territorial aggression — is a subject of heated debate.
We’re fooling ourselves if we think that even in a free market, there won’t be unscrupulous sellers who will try to sell to unsuspecting buyers unsafe food and drugs, dangerous cars, and shoddy housing, or that there won’t be unscrupulous buyers who will try to cheat unsuspecting sellers with false claims about their ability to pay.
In the real world, knowledge is imperfect. It’s impossible always to know when someone is telling the truth, and people are vulnerable to opportunists. Such unsociable behavior, if not restrained by internal norms, requires external constraints — regulation — of some kind. But even libertarians too often concede that regulation means expanding the role of the state.
If, by “regulation,” we mean external constraints on harmful behavior by buyers and sellers, then people in free markets do need regulation to protect them. The mistake is to assume that only government — that is, a monopoly over the legitimate initiation of violence — can do the regulating.
Free markets unleash forces not only to lower costs and to innovate; they also unleash the resourcefulness of ordinary people to regulate ant…